Weak Industrial Production + Poor Monsoon – GDP Downside Risks ?

The Industrial production (IP) growth decelerated to -1.8%YoY in June 2012 from +2.5%YoY in May. The manufacturing segment output weakened by -3.2%YoY as compared with growth of 2.6%YoY in May. Within manufacturing, industry group electric machinery and apparatus contributed most to the weakness, declining by 56%YoY, followed by food product and beverages (-5.7%), tobacco products (-5.4%) and motor vehicles.

Capital goods output declined sharply by 27.9%YoY in June, largely on account of high base effect of Jun-11. Mining output growth recovered to 0.6%YoY, after declining by -0.6%YoY in May. Electricity output growth also improved, accelerating by 8.8%YoY in June compared with 5.9%YoY in May.

Consumer goods output growth decelerated to 3.5%YoY in June vs. 4.5%YoY in May. Consumer durables growth slowed to 9.1%YoY in June (vs. 9.8% in May) and consumer non-durables output fell by 1%YoY.

65 Years after Independence Indian Agricultural is still a Gambling in Monsoon. Poor monsoon in the season thus far (17% below normal) and consequent adverse impact on area under cultivation (-9.6%YoY) means that the summer crop output growth will be significantly below our forecast.

Stagflation will persist over the next three quarters. Government’s loose fiscal policy and persistent strong rise in rural wage growth without commensurate increase in productivity growth is at the heart to the current stagflation type environment. With all this, GDP is bound to grow mere 5-5.5% and when compared to the Inflation we’d actually have de-growth.